1. Field of the Invention
The present invention relates generally to financial products, more specifically to computer-based systems for pricing financial products, and, even more particularly, to a computer-based system for pricing an index-offset deposit product.
2. Background of the Invention
A call option is a financial instrument that gives its holder the right (but not the obligation) to purchase a given security at a pre-specified price, called the strike price or exercise price, from the option seller. This structure allows the option holder to profit if the price of the security exceeds the strike price at the time of expiry of the option. At the same time, the maximum possible loss to the holder is limited to the price paid for the option if the security is worth less than the exercise price, since the holder is not forced to buy the security at an above-market price.
Options usually have a limited lifespan (the term) and have two main styles of exercise, American and European. In an American-exercise call option, the security may be purchased for its strike price at any time during the term. In a European-exercise call option, in contrast, the security may only be purchased at the end of the term.
An indexed call option is one in which the role of “securities price” is played by an index such as the S&P 500 or the Nasdaq 100. Since delivering the basket of securities that comprise the index is usually impractical, indexed call options are usually cash-settled. This means that if the index is greater than the strike price at time of exercise, the option seller pays the option holder the difference in price in cash: if the index is less than or equal to the strike, no payment is made.
Many investors currently purchase indexed call options directly to help achieve a desired balance of risk and return in their investment portfolios. Many investors and consumers also benefit indirectly from investments in such options when they buy index-linked deposit products such as indexed annuities or indexed certificates of deposit (CD's). This is because index-linked deposit products are usually constructed from a mixture of indexed call options and fixed-income instruments such as bonds or mortgages.
Investors and consumers obtain valuable benefits through the use of index-linked deposit products currently available in the market, such as:                a. The ability to benefit from increases in the index while protecting principal; and        b. Achievement of diversification by linking investment returns to an index aggregating the performance of multiple issuers, rather than just one.        
There are also some disadvantages associated with currently available index-linked products, including:                a. The lack of fixed-income linkage, i.e., the inability to take advantage of increases in interest rates after product purchase, because returns are tied to one index for the length of the term; and,        b. Lower-than-desired “participation rates” (the proportion of increases in the index credited to the product), especially during times of low interest rates or high index volatility.        
The last point may require explanation. Participation rates are low when interest rates are low because most of the amount deposited must be invested in fixed income to guarantee return of principal, leaving little left over to buy indexed options. Similarly, higher index volatility leads to higher option prices for the most common types of options, driving participation rates down.
The investor or consumer therefore must face the situation that achievement of index participation and a guarantee of principal generally precludes earning an attractive interest rate. A difficult choice must be made.
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Accordingly, there is a need for an indexed deposit product structure permitting the purchaser to enjoy an attractive combination of a plurality of index-linkages and at least one fixed-income-linkage while guaranteeing a specified percentage of principal. The plurality of index-linkages may take the form of a combination or a blended index of two or more indices. There is correspondingly a need for a computer-based system for pricing such an indexed deposit product structure.